May 24, 2017
What We’re Reading This Week
Quadruple Leveraged ETF
Previously, I argued that ETFs do not signal a shift in retail investor sentiment, but rather, they are a natural progression towards a more efficient market.
Case in point, the SEC recently approved a 4x leveraged ETF. Previously, 3x was the limit. Introducing a 4x leveraged ETF is simply a more efficient way for investors to lose money. Personally, I long for the good old days when you could buy an ETF and just be happy with one or two times the daily price swing. But you know, kids today…
Some people have theorized that the move to approve such a risky investment is directly related to former SEC Chairman Mary Jo White’s resignation. You can also read it as someone hastily approving something that they didn’t understand:
“[ForceShare’s] 4x fund structure instead was presented to regulators as a type of commodity product that doesn’t need to meet the same standard of investor protections that mutual funds must offer, such as oversight by independent boards of directors.”
“ForceShares’ application could have escaped the attention of commissioners before its approval because the SEC staff has the authority to make some decisions on its own.”
Anyway, commissioners at the SEC felt this deserved a second look and have postponed the fund’s approval pending further review.
One thing I love about this industry are the euphemisms. A complex, high risk investment like this is referred to as an “exotic” investment. That’s really great, right? It has a certain ring to it, like who wouldn’t want to own something exotic in their portfolio? It’s also stupid though. If I sold a car that would either drive 4x over or under the speed limit I couldn’t market it as exotic. I imagine regulators would make me use language like “highly dangerous” and “not approved for driving on a road.”
401(k) Accounts Are Growing
In the 1980s, self-directed retirement accounts, like a 401(k), started to really gain prevalence. Today, they are the norm. I jokingly refer to this shift as a “failed retirement savings experiment.” Failed, because according to Boston College, roughly half of the working population will not be able to maintain their standard of living in retirement.
Enter auto-escalation. Fidelity reported record average balances in 401(k) accounts, putting the average at $95,500. Additionally, contributions reached a record high at 12.9%, due in large part to a 401(k) feature called auto-escalation, automatically increasing an employee’s contribution by 1% annually. Additionally, automatic enrollment in 401(k) plans is on the rise. According to Fidelity’s research, 68% of the increase in the first quarter of 2016 was attributed to auto-escalation.
There is a lesson here. When we look at national saving rates or articles about retirement, it can be easy to assume that people aren’t saving because they can’t afford it. I won’t argue that this isn’t the case for a lot people, but the evidence also suggests that a fair number of people are just too lazy to save. Combined with automatic enrollment in a 401(k), automatically increasing contributions did not substantially interrupt people’s cash flow. This means two things for people having a difficult time savings for retirement:
- There may be some kind of opportunity to open a company that will hack investor’s bank accounts and siphon people’s money into some kind of savings account without their knowledge.
- That company sort of already exists.
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